FHA Loans and FHA Mortgages

Mortgages and points, sounds like evil words. It could save you thousands. I have been doing this for almost 16 years now. When I first got into this industry, sure, I was green….brand new. Sure, I had classes in High School and College in regards to financing, economics, managing your money, and even some accounting classes. But what got me were the lawyers and the accountants that told their clients not to do mortgages with points associated to them. Or your next-door neighbor that got this great deal with zero points and that this was the way to go. Even the talk radio shows that might have been talking about one specific thing in regards to points and zero points, but that you came into the middle of the program. So who should you believe? Don’t believe this next statement….  “points are suppose to mean that, we as loan officers, make more money.”  This is not true.  Points are used to buy down the rate.  Now, there are many that abuse points to make more money, but this should not be the norm.

One of my first questions when speaking to a client, refinancing or purchasing, is what their goals are for the near future and their long-term. Now, many of us don’t have these so-called crystal balls that many claim to have. Things can happen at any time. But I have a lot of passion in what I do and I care what I do, helping those clients to achieve their dreams. By giving the consumer options in what kinds of mortgage programs there are and the costs behind these programs, I can help them achieve this dream and their goals.

This scenario can sometimes be simple math and not the calculators online that tell you if you should refinance or even buy a house. These calculators are a formula made up by someones calculated guesses and certain factors included. I am not looking for the typical answers of; “I want Zero points” and “I want a no cost loan". Just because the client says that they want this type of loan, doesn’t mean that it fits their needs.

I am going to use an example in regards to someone doing a mortgage of $300,000. Let’s keep the example simple by stating the only closings costs will be zero points and with 2 points. I am not using credit scores or mortgage insurance.  Again, keeping this very simple.

Part 1

At this point, the difference of payment is $120.89 a month. The total points that you will be paying is $6,000. Basic math says that it would take you 49.63 months to recoup the points that you paid. That is less than 4.2 years, which means that your break even point on paper is 4.2 years. But let’s take it one step further. Assume that you are in a 28% tax bracket for income tax purposes. You will be writing off $1,680 on your taxes the next year.  So if you subtracted the $1,680 from the $6,000, you actually paid $4,320 in points.  Now your break even point would be 35.73 months which would make that slightly less than 3 years. WOW….. So if you stayed in your house for more than 3 years, you are making money.

You need to consult your accountant on the different tax deductions when it comes to purchasing and refinancing. There is also a difference in how much you can write off depending on if you are purchasing a home or refinancing your home.

Part 2

Here is where so many lenders fail in educating the average client or where the client doesn’t see the true savings. You also have the amortization of the loan.

If you kept the loan for 3 years (the break even point) at 6.375%, your principal balance would be $289,008. If you were paying 5.75% for those same 3 years, your principal balance would be $287,725. This is a difference of $1,283 savings by paying 2 pts to get your interest rate lower.

Summary :  Overall, in reality, your break even point would be less than 3 years, because of the amortization. It would almost be 2 years if you stayed in the house for 3 years. Talk about putting your money to good use. Another reason why sometimes putting less down and using that extra money for your rate would make more sense.

In closing:

Again, these are examples and not including other lender costs or even mortgage insurance depending on your down payment. This comparison is just for informational purposes in explaining how points and no points work. And yes, you would need that extra money to even buy the rate down. But you can also get it from the seller, in a seller’s concession. This doesn’t always apply to everyone because of the money issues. And it also comes down to your monthly and yearly goals, may it be short term or long term. But this is a good dissection of what your money can do for you and how it can work for you. And one of the old MYTHS of points is that the lender is making more money. This is not true at all, as long as your lender is comparing true apples to apples.

***These rates and points are an example from 05/21/2008 for a 30-day lock on a conventional loan with credit scores above 680 and no mortgage insurance. It all depends on your income and credit qualifications in order to get these rates.***